Tourism Economics: The Economic Impact of TIDS in California

Below are excepts from the above referenced Oxford Economics Study

Overview of Tourism District Structure

Tourism Improvement Districts are a hospitality-specific model of the traditional Business Improvement District (BID). TIDs use special benefit assessments, rather than general taxes, to raise revenue to use for destination marketing and tourism promotion. Funds raised through these assessments cannot be diverted into other government programs and can only be spent on programs that benefit those who pay into the district, in most cases hotels.

This structure has several advantages that help to explain its popularity among participating businesses. The formation of the TID and the accompanying assessment are approved by the payers themselves, rather than the electorate or legislative bodies (beyond enabling legislation). Typically, the assessments have a defined term after which they must be renewed by payers, unlike general taxes. This
combination assures that the assessed businesses see economic benefit in the program, both prospectively at the time of creation and on an ongoing basis through the renewal process.

In California, TID funds are typically structured within existing DMOs as a supplement to the organization’s funding streams. In some cases, new organizations supported only by TID funds have been created for the purpose of tourism promotion. This supplemental funding structure often enhances proportional returns because incremental dollars can be allocated in greater proportion directly to marketing rather than administrative and overhead costs.

The first TID in the nation was created in West Hollywood, California in 1989 under California’s “Parking and Business Improvement Area Law of 1989,” and a second was created in Costa Mesa in 1995. Since 2000, the number of TIDs has expanded rapidly, under both the original act and the “Property and Business Improvement Act of 1994.” As of mid-2016, there are 96 TID districts throughout California, with a total combined assessment of an estimated $207.1 million. The success of the program has led to its adoption by destinations in other states, starting with Washington in 2003. As of mid-2016, there are 58 TID districts operating in eleven states outside of California.

The Rationale for Tourism Improvement Districts

The case for destination marketing is broad and compelling. Indeed, across the US, there are more than 500 regional destination marketing organizations that had a combined budget of $1.9 billion in 2015.

In summary, coordinated destination marketing is vital because:
  • The destination and the experience it offers is the fundamental motivator of tourism. As a result, the message to a potential traveler extends beyond the offerings of a single business.
  • Individual businesses lack the capacity to conduct certain types of marketing effectively, and certain benefits accrue across the  economy rather than just to an individual business. 
  • Scale and marketing infrastructure also enhance promotional efficiencies, leveraging the impact of each marketing dollar.
  • Destination marketing helps address challenges of a perishable tourism product and the seasonality of demand.
  • Competing destinations are actively marketing and a failure to engage with travel markets results in lost market share.

The Seasonality of Demand

In manufacturing, inventory can be stored or redistributed to markets where demand is stronger, and seasonal fluctuations in demand can be managed effectively. This same degree of flexibility doesn’t exist for many tourism-dependent businesses, the product of which is perishable, fixed in one market, and typically under more heavy demand during some seasons and days of the week than others. In the lodging sector, the product sold is a room night, which cannot be held over to another day. If a room goes unoccupied, the potential room night sale and associated revenue are lost. The hotel product depends heavily on infrastructure, which cannot be picked up and moved to another location. Also, the upfront investment of capital required in lodging, and the fixed nature of many operating costs, results in a situation in which successful ongoing operations are heavily dependent on demand reaching a “break even” level of operations. In situations in which demand is concentrated in peak periods, staffing can be challenging for employers and employees alike due to season duration.

Effective destination marketing helps address these challenges. By broadening potential visitors’ understanding of a destination’s offering, marketing is frequently designed to boost demand outside of the usual peak demand periods. This helps businesses make use of resources that would otherwise be idle, extends the duration of seasonal employment, and supports a better base for year-round jobs. This incremental activity supported by destination marketing can be critically important to successful and profitable operations in the tourism industry. The end  result is a level of market demand that is more stable during the year, benefits local businesses, employees, and other stakeholders, and expands the tax base for a jurisdiction.

Analysis of Economic Impact of TIDs in California

Significantly increased spending on lodging, food and beverages is the most significant impact of implementation of TID marketing programs.  Read  the full details in the Section 4 of the study: The Returns of the Tourism Improvement District Structure.  Beyond increases in revenues for lodging and restaurants in a region, other effects ripple throughout the economy.

These indirect effects are calculated in two categories. 
  • First, indirect effects result from the supply chain impact when new spending generates additional demand in related industries that  provide inputs. For example, the direct spending at restaurants sparks the need for food and beverage inputs, tables and chairs, energy inputs, and professional support services from accountants and lawyers. Some of the supply chain effects occur in the local economy and some of the additional demand is placed on producers in other regional economies.

  • Second, the direct spending and the additional demand placed on other industries generate additional income for workers in those industries. A portion of the additional income earned is spent in the economy again, and this is considered the induced effect. Again, a portion of this induced effect occurs in the local economy and a portion occurs outside the local region. The indirect and induced impacts that occur outside the local region are considered leakage, as this new economic activity occurs elsewhere.

Analysis indirect Effects

Based on  I-O modeling results, the implied output multiplier can be calculated as Total Output / Direct Output = Output multiplier, or 1.93. This implies that for every dollar in direct visitor spending as a result of TID marketing, an additional 93 cents in sales are realized by other businesses in the regional economy. This means that the impacts of TID marketing funding are not be limited to tourism-related industries, but are spread across industries.

Key Takeaways from "Made in America: Travel's Essential Contribution to Economic Development"

Report August 2018
Travel Impacts Communities Across America

Investing in tourism promotion stimulates visitor demand, which in turn generates tax revenue benefiting local residents. Lawmakers and community leaders who understand and invest in the value of travel are able to reduce the tax burden on their constituents and are in a more favorable financial position to fund essential services that make their communities stronger.

Collaboration Creates Attractive Communities—for both Residents and Visitors

Investing in the improvement of a destination makes it not only more attractive to visitors, but also to talent. What may begin as an effort to bolster the livability of a place can turn into a travel boom that offsets costs and creates an unexpected tourism economy with lasting value.

Destination Marketers are Economic Developers

Quality of life is increasingly important to relocation decisions. Destination marketing organizations are skilled storytellers that can empower and enliven efforts to entice businesses to headquarter or grow in an area.

Destinations Create a Sense of Place and Pride for Residents

The residents of a community are at heart the decision-makers––their opinions matter. Residents who take pride in their community are valuable advocates for its storytelling, serving as a trusted resource to friends and family and other potential visitors.

Destination Marketers are Small Business Champions

Small businesses make a destination unique, vibrant and more attractive to visitors. Not only is travel a significant part of the small business community, travel promotion can stimulate small business growth by generating visitor demand.

Destination Marketers Build Bridges to Rural Communities

Destination marketing organizations are champions of rural regions, shining a spotlight on places that may be otherwise overlooked by visitors and invigorating economies of under served areas.

Destinations are Crisis Managers

Destination marketers are unexpected—but critical—resources during a crisis situation. During a crisis, DMOs, CVBs or tourism offices often serve as a source of credible information for both visitors and residents. During recovery, destination marketers are also uniquely positioned to get the word out that an area is open for business.

Destinations are Brands Worth Investment

Brand awareness alone does not guarantee returns. The investment in cultivating brand affinity creates an emotional bond to a destination that will differentiate it from the competition and deliver greater long term value.

What’s at Stake When Promotion is Cut

Without effective promotion, states and cities cede the economic benefits to competing destinations and fall behind the competition. It is a mistake from which it takes many years to recover. And it is a mistake that is easily avoided when governments take a long view on their economic outlook.